"Will I outlive my retirement money?" This is one of the top fears for people who are starting to prepare for their retirement years. The future is full of unknowns and preparing for retirement means putting an almost definite number on an indefinite part of life.
Determining how much money you need in retirement is a process. It shouldn't be a number that you pull out of thin air. Calculating the amount you should prepare for retirement involves looking at your current financial situation and developing an approach based on your goals, intended timeline, and risk tolerance.
The process should take into consideration all your potential sources of retirement income, and also may project what your income would look like each year in retirement, which means it is best practice to go through the majority of these steps with the assistance of your financial professional.
They can help you identify some of these financial and lifestyle factors you should consider when deciding how much you should put aside for retirement.
You may see retirement as an extension of the present rather than the future.
This is only natural, as we all live in the present, but the future will arrive and as much as you are looking forward to the good aspects of retirement, it is important to be realistic about the possibility that you will encounter issues, big and small. The costs you have to shoulder later in retirement may exceed those at the start of retirement.
You may have a health insurance gap.
For most of the workforce, their health insurance is tied to and partially paid for through their job. If you retire before age 65, what will you do about health coverage? You may shoulder 100% of the cost. Suppose you become disabled or seriously ill, and working is out of the question. How will you make ends meet?
Medicare will not pay for everything. Unless there's a change in how the program works, you may have a number of out-of-pocket costs, including dental and vision care.
You may have heard of the "4% rule," a guideline stating that you should take out only about 4% of your retirement savings annually. Some retirees try to abide by it, but others withdraw 7% or 8% per year. Why is this? In the first phase of retirement, people tend to live it up. More free time naturally promotes new ventures and adventures and an inclination to live a bit more lavishly. This isn’t necessarily wrong, but if you can imagine yourself following a similar path, it is a good reason to increase the amount you plan to save.
Talking About Taxes.
It can be a good idea to have both taxable and tax-advantaged accounts in retirement. Assuming your retirement will be long, you may want to assign this or that investment to its "preferred domain," which means the taxable or tax-advantaged account that is most appropriate for it as you pursue a better after-tax return for your entire portfolio.
Retiring with debts.
Some find it harder to preserve (or accumulate) wealth when you are handing portions of it to creditors. It is always important for you to decide if you want to tackle your debts before retirement, even if it means delays in your expected timeline, or maintaining your course and dealing with remaining debt balances later.
Age may catch up to you sooner rather than later.
As anyone who has ever lived alone realizes, a single person does not simply live on 50% of a couple's income. Keeping up a house or even a condo can be tough when you are elderly. Driving can also be a concern. If your spouse or partner is absent, will someone be available to help you in the future?
Similarly, you may stay fit, active, and mentally sharp for decades to come, but if you become mentally or physically infirm, you need to be sure you can trust the people around you to manage your finances.
Actuaries at the Social Security Administration project that around a third of today's 65-year-olds will live to age 90, with about one in seven living 95 years or longer. The prospect of a 20- or 30-year retirement is not unreasonable, yet there is still a lingering cultural assumption that our retirements might duplicate the relatively brief ones of our parents.
Timing Social Security.
As Social Security benefits rise about 8% for every year you delay receiving them, waiting a few years to apply for benefits can position you for higher retirement income. Filing for your monthly benefits before you reach Social Security's Full Retirement Age (FRA) can mean comparatively smaller monthly payments.
Future articles will discuss further the role of Social Security in retirement preparations.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.